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Washington Prime Group Reports Third Quarter 2017 Results

COLUMBUS, Ohio--(BUSINESS WIRE)--Oct. 25, 2017--
Washington Prime Group Inc. (NYSE: WPG) today reported results
for the third quarter ended September 30, 2017 that reflect continued
progress on the execution of the Company’s financial, operating and
strategic objectives.

Third Quarter Results

Net loss attributable to common shareholders for the third quarter of
2017 was $11.9 million, or $0.06 per diluted share, compared to income
of $1.4 million, or $0.01 per diluted share, a year ago. The
year-over-year difference was primarily attributable to higher interest
expense in 2017 related to the August unsecured notes offering, lower
net operating income related to the Company’s Tier 2 enclosed properties
and decrease in amortization of lease intangibles.

Funds from Operations (“FFO”) for the third quarter of 2017 were $81.5
million, or $0.37 per diluted share. This compares to $100.8 million, or
$0.46 per diluted share, during the same quarter a year ago. The
decrease in FFO for the quarter primarily relates to dilution resulting
from property dispositions and higher interest expense related to the
unsecured notes offering.

Comparable net operating income (“NOI”) for the Company’s total
portfolio decreased 1.4% during the third quarter of 2017, compared to a
year ago. Comparable NOI growth for the Company’s 37 Tier 1 enclosed
retail properties decreased by only 0.6% in the third quarter of 2017,
compared to a year ago, demonstrating stable performance. Comparable NOI
for the Company’s 51 open air centers increased 3.4% in the third
quarter of 2017, compared to a year ago. Collectively, the Company’s
Tier 1 enclosed retail properties and open air centers comprised 81% of
total portfolio NOI as of September 30, 2017 with comparable NOI growth
of 1.1% during the third quarter of 2017, compared to a year ago.

Reconciliations of FFO and comparable NOI (non-GAAP measures) to GAAP
measures are included in this release.

Lou Conforti, CEO and Director stated: “The third quarter is best
illustrated by several financial, strategic and operational actions
which strengthened our balance sheet; streamlined decision making;
resulted in meaningful arbitrage opportunities; furthered our objective
of tenant diversification; and advanced our hybrid town center mandate
which now constitutes 70% of assets we describe as enclosed.

“Occupancy was basically flat for the third quarter at 92.3%. A 1.4%
decline in comparable NOI warrants further explanation. The decline was
primarily attributable to previously reported bankruptcies and
judiciousness on our part to focus upon prospects whose presence
actually benefits our assets. Breaking it down, comparable NOI growth
for Tier 1 assets decreased 0.6%, open air assets increased 3.4%, and
Tier 2 assets decreased 9.1%. While any shortcoming whatsoever drives me
crazy, as long as it is within an anticipated minimal variance and
results from our being deliberate about properly curating tenants, I am
confident this measured approach will better serve our assets in the
long run.

“During my 16 months at WPG, one fact has become glaringly evident. Our
resources, which include both time and money, are better directed toward
those tenants which serve to diversify, optimize and energize our
assets. Make no mistake, we have leased a heck of a lot of space this
year: 3.0 million square feet as of September 30, of which 48% was to
lifestyle tenancy. What we will not be doing is taking the easy way out
by accommodating undifferentiated tenants in over concentrated
categories.

“We continue to address Tier 2 assets in a no-nonsense fashion: We
handed the lender back the keys to Valle Vista Mall whereby a $40
million mortgage obligation was extinguished; signed a definitive
agreement to sell Colonial Park Mall for $15 million, as we could not
justify marginal capital spend; and negotiated the $55 million
discounted payoff of Southern Hills Mall, a Tier 1 quality asset which
was hampered by excessive leverage of $99.7 million. This discounted
payoff reflects a capitalization rate of 13.5%, a 600-basis-point
improvement over the debt yield.

“The Company also continued to strengthen its balance sheet and
demonstrate access to capital as exhibited by our $750 million
seven-year unsecured notes offering. As we have previously stated, it
was imperative to address the financial wherewithal of the Company and
we have accomplished this mandate with minimal dilution. Strategically,
we evidenced our ability to act upon arbitrage opportunities. For
instance, the definitive agreement for the disposition of outparcels
leased to various restaurant operators for proceeds of $67.2 million
equates to a mid-six percent capitalization rate on in place NOI, and
the previously mentioned $55 million discounted payoff of Southern Hills
Mall.

“Redevelopment continues according to schedule and budget. We currently
have 61 active projects underway ranging between $1-$60 million. The
9.5% average estimated yield on these projects is intact and we actually
expect these transformative projects to perform even better when
ancillary impact is taken into account. Last, new initiatives are also
well underway. Our eCommerce platform, Tangible, is under construction
and should be operational in its first four assets during the fourth
quarter; Shelby’s Sugar Shop, our candy store joint venture, likewise;
and our first common area local craft brewer is opening within thirty
days.

“Our message is straightforward: Protect our shareholders from industry
volatility with a rock solid balance sheet; respect our demographic
constituencies by not offering the ‘same old same old’; focus on assets
which serve as the dominant retail venue within a secondary marketplace;
address common area utilization as it may very well be the holy grail;
and as always, grind it out.”

Operational Highlights

Ending occupancy for the total portfolio was 92.3% as of September 30,
2017, as compared to 92.7% a year ago. Ending occupancy for the enclosed
retail properties was 90.3%, which included Tier 1 enclosed retail
properties which ended the quarter at 92.1% leased, flat compared to a
year ago. Ending occupancy for the open air portfolio was 95.3% as of
September 30, 2017, compared to 95.2% a year ago.

Base rent per square foot for the total portfolio was $21.64, flat
compared to a year ago. Inline store sales at the Company’s enclosed
retail properties were $364 per square foot for the twelve months ended
September 30, 2017, compared to $373 per square foot for the same period
a year ago. Operating metrics by asset group can be found in the third
quarter 2017 Supplemental Information report available on the Company’s
website.

Financial Activity

Unsecured Notes Offering

On August 4, 2017, the Company closed on a public offering of $750
million principal amount of its 5.950% unsecured notes due August 15,
2024. The net proceeds from the offering of approximately $730 million,
after deducting the underwriting discount and other offering expenses,
were used to repay the outstanding indebtedness under its May 2014 term
loan and reduce outstanding borrowings under its June 2015 term loan.
The successful completion of the offering significantly enhanced the
debt maturity profile of the Company.

Dispositions

On October 4, 2017, the Company signed a definitive agreement to sell
Colonial Park Mall, located in Harrisburg, Pennsylvania, to an
unaffiliated private real estate investor for a purchase price of $15.0
million. The agreement is subject to customary closing requirements.
During the three months ended September 30, 2017, the Company recorded a
non-cash impairment charge of $20.9 million related to the expected sale
of Colonial Park Mall.

On September 20, 2017, the Company executed a purchase and sale
agreement with an affiliate of Four Corners Property Trust, Inc. to sell
41 restaurant outparcels located on 22 of the Company's enclosed retail
properties and open air centers for a purchase price of approximately
$67.2 million. The Company expects the transaction to close in two
tranches beginning in the fourth quarter of 2017 with the second tranche
to be completed in the first half of 2018, subject to due diligence and
customary closing conditions.

Mortgage Loans

On October 17, 2017, an affiliate of the Company completed a discounted
payoff of the $99.7 million mortgage loan secured by Southern Hills
Mall, located in Sioux City, Iowa, for $55.0 million. The Company will
record a gain between $40.0 million and $45.0 million related to this
repayment during the fourth quarter of 2017. This accretive financial
transaction resulted in the Company retaining ownership and management
of Southern Hills Mall, a dominant enclosed retail venue in a secondary
market. The debt yield on the mortgage loan was 7.5% with a yield on the
purchase of 13.5%.

On October 3, 2017, the $40.0 million mortgage loan secured by Valle
Vista Mall, located in Harlingen, Texas, was extinguished upon the
property transition to the lender on October 3, 2017. The Company will
recognize a $27.0 million gain on debt extinguishment related to the
transition during the fourth quarter of 2017.

On October 2, 2017, the Company repaid the $99.6 million mortgage loan
on WestShore Plaza, located in Tampa, Florida, adding the Tier 1
enclosed property to the Company’s unencumbered pool of assets.

The Company has now addressed all 2017 mortgage debt maturities and has
nearly $316 million of NOI being generated from its unencumbered
properties, or approximately 57% of total property NOI.

Redevelopment Highlights

The Company expects redevelopment spending, including the pro-rata share
of joint venture properties of approximately $100 million in 2017. Major
redevelopment projects recently announced include:

Cottonwood Mall, located in Albuquerque, New Mexico – The
approximately $21 million project will add new retailers to the
center. The high visibility anchor space previously occupied by a
Macy’s department store, which closed earlier this year, will be
redeveloped for new uses that include off-price and home furnishings
retailers. The project is expected to be completed in 2018.

Fairfield Town Center, located in Houston, Texas – The approximately
$28 million project represents the final phase of the development
which will add approximately 130,000 square feet to the open air
center that opened in 2016. The project will be anchored by the
addition of a movie theater, off-price retailer and additional big box
and small shop stores. The project is expected to be completed in 2019.

2017 Guidance

The Company updated its guidance for fiscal 2017 net income attributable
to common shareholders to the range of $1.39 to $1.48 per diluted share,
and guidance for FFO, as adjusted, in the range of $1.63 and $1.67 per
diluted share. The update to guidance for net income primarily relates
to the impairment charge in the third quarter and a gain on the first
tranche of the restaurant outparcel sale expected to occur in the fourth
quarter. Net income and FFO guidance for the year includes increased
interest expense from the unsecured notes offering, which was partially
offset by the positive impact from the discounted payoff of the mortgage
loan secured by Southern Hills Mall.

Primarily due to retailer bankruptcies that occurred during the third
quarter of 2017, as well as the impact of real estate tax reimbursement
revenue, the Company now expects to deliver comparable NOI growth of
(1.0)% to 0.0% for the year ending December 31, 2017.

The following table provides the reconciliation for the expected range
of GAAP estimated net income attributable to common shareholders per
diluted share to non-GAAP estimated FFO per diluted share, as adjusted,
for the year ending December 31, 2017:

Low

High

End

End

Estimated net income attributable to common shareholders per diluted
share

$

1.39

$

1.48

Add: Impairment charges through 9/30/2017

0.13

0.13

Less: Gain on sale of interests in properties and outparcels

(0.81

)

(0.82

)

Depreciation and amortization including share of unconsolidated
entities

1.31

1.29

Estimated FFO per diluted share

$

2.02

$

2.08

Less: Gain on debt extinguishment, net

(0.39

)

(0.41

)

Estimated FFO per diluted share, as adjusted

$

1.63

$

1.67

The following table provides a reconciliation of the expected operating
income from GAAP financial statements to the Company’s non-GAAP NOI
projections for the year:

For the fourth quarter of 2017, the Company estimates net income
attributable to common shareholders to be in the range of $0.58 to $0.62
per diluted share and adjusted FFO to be in the range of $0.44 to $0.48
per diluted share. Key assumptions for the fourth quarter of 2017
include the gain on the debt extinguishments for Southern Hills Mall and
Valle Vista Mall, as well as an expected gain on the first tranche of
the restaurant outparcel sale.

A reconciliation of the range of GAAP estimated net income per diluted
share to non-GAAP estimated FFO per diluted share, as adjusted, for the
fourth quarter of 2017 follows:

Low

High

End

End

Estimated net income attributable to common shareholders per diluted
share

$

0.58

$

0.62

Less: Gain on sale of outparcels

(0.14

)

(0.15

)

Depreciation and amortization including share of unconsolidated
entities

0.30

0.33

Estimated FFO per diluted share

$

0.74

$

0.80

Less: Gain on debt extinguishment, net

(0.30

)

(0.32

)

Estimated FFO per diluted share, as adjusted

$

0.44

$

0.48

Earnings Call and Webcast on October 26

Washington Prime Group will host a conference call at 11:00 a.m. ET on
Thursday, October 26, 2017, to discuss the Company’s third quarter
results. Live streaming audio of the conference call will be accessible
from the investor relations section of the Company’s website.

The dial-in number for the conference call is 844.646.4463 (or
+1.615.247.0256 for international callers), and the participant passcode
is 88921101. The live audio webcast of the call will be available on the
investor relations section of the Company’s website at www.washingtonprime.com.

A replay of the call will be available on the Company’s website, or by
calling 855.859.2056 (or +1.404.537.3406 for international callers),
passcode is 88921101, beginning on Thursday, October 26, 2017, at
approximately 1:00 p.m. ET through midnight on Thursday, November 9,
2017.

Supplemental Information

For additional details on Washington Prime Group’s results and
properties, please refer to the Supplemental Information report on the
investor relations section of the Company’s website. This release as
well as the supplemental information have been furnished to the
Securities and Exchange Commission (“SEC”) in a Form 8-K.

About Washington Prime Group

Washington Prime Group Inc. is a retail REIT and a recognized leader in
the ownership, management, acquisition and development of retail
properties. The Company combines a national real estate portfolio with
an investment grade balance sheet, leveraging its expertise across the
entire shopping center sector to increase cash flow through rigorous
management of assets and provide new opportunities to retailers looking
for growth throughout the U.S. Learn more at www.washingtonprime.com.
Trademark applications have been filed with the U.S. Patent and
Trademark Office (“USPTO”) for the names “Washington Prime Group,”
“Shelby’s Sugar Shop” and “Tangible” and are currently pending. In
addition, a non-provisional patent application has been filed with the
USPTO for the “Tangible” concept.

Non-GAAP Financial Measures

This press release includes FFO, AFFO and NOI, including same property
NOI growth, which are financial performance measures not defined by
generally accepted accounting principles in the United States (GAAP).
Reconciliations of these non-GAAP financial measures to the most
directly comparable GAAP measures are included in this press release.
FFO, AFFO and comparable NOI growth are financial performance measures
widely used by securities analysts, investors and other interested
parties in the evaluation of REITs. The Company believes that FFO
provides investors with additional information regarding operating
performance and a basis to compare the Company’s performance with that
of other REITs.

The Company uses FFO in addition to net income to report operating
results. We determine FFO based on the definition set forth by the
National Association of Real Estate Investment Trusts (NAREIT) as net
income computed in accordance with GAAP, excluding real estate related
depreciation and amortization, excluding gains and losses from
extraordinary items and cumulative effects of accounting changes,
excluding gains and losses from the sales or disposals of previously
depreciated retail operating properties, excluding impairment charges of
depreciable real estate, plus the allocable portion of FFO of
unconsolidated entities accounted for under the equity method of
accounting based upon economic ownership interest. The Company also
discusses FFO, as adjusted, or AFFO. Descriptions of items adjusted are
provided in the press release. Certain items, such as merger,
restructuring and transaction related costs and gain on debt
extinguishment, while included in FFO and net income, do not affect the
ongoing performance of the properties and have been excluded from AFFO
to enhance comparability.

NOI is used by industry analysts, investors and Company management to
measure operating performance of the Company’s properties. NOI
represents total property revenues less property operating and
maintenance expenses. Accordingly, NOI excludes certain expenses
included in the determination of net income such as corporate general
and administrative expense and other indirect operating expenses,
interest expense, impairment charges and depreciation and amortization
expense. These items are excluded from NOI in order to provide results
that are more closely related to a property’s results of operations. In
addition, the Company’s computation of same property NOI excludes
termination income and income from outparcel sales. The Company also
adjusts for other miscellaneous items in order to enhance the
comparability of results from one period to another. Certain items, such
as interest expense, while included in FFO and net income, do not affect
the operating performance of a real estate asset and are often incurred
at the corporate level as opposed to the property level. As a result,
management uses only those income and expense items that are incurred at
the property level to evaluate a property’s performance. Real estate
asset related depreciation and amortization, as well as impairment
charges, are excluded from NOI for the same reasons that they are
excluded from FFO pursuant to NAREIT’s definition.

Non-GAAP financial measures have limitations as they do not include all
items of income and expense that affect operations, and accordingly,
should always be considered as supplemental to financial results
presented in accordance with GAAP. Investors should understand that the
Company’s computation of these non-GAAP measures might not be comparable
to similar measures reported by other REITs and that these non-GAAP
measures do not represent cash flow from operations as defined by GAAP,
should not be considered as alternatives to net income determined in
accordance with GAAP as a measure of operating performance and are not
alternatives to cash flows as a measure of liquidity. Investors are
cautioned that items excluded from these measures are significant
components in understanding and addressing financial performance.
Reconciliations of these measures are included in the press release.

Regulation Fair Disclosure (FD)

The Company routinely posts important information online on the investor
relations section of the corporate website. The Company uses this
website, press releases, SEC filings, conference calls, presentations
and webcasts to disclose material, non-public information in accordance
with Regulation FD. The Company encourages members of the investment
community to monitor these distribution channels for material
disclosures. Any information accessed through the Company’s website is
not incorporated by reference into, and is not a part of, this document.

Forward-Looking Statements

This news release contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 which
represent the current expectations and beliefs of management of
Washington Prime Group Inc. (“WPG”) concerning the proposed
transactions, the anticipated consequences and benefits of the
transactions and the targeted close date for the transactions, and other
future events and their potential effects on WPG, including, but not
limited to, statements relating to anticipated financial and operating
results, the company’s plans, objectives, expectations and intentions,
cost savings and other statements, including words such as “anticipate,”
“believe,” “confident,” “plan,” “estimate,” “expect,” “intend,” “will,”
“should,” “may,” and other similar expressions. Such statements are
based upon the current beliefs and expectations of WPG’s management, and
involve known and unknown risks, uncertainties, and other factors which
may cause the actual results, performance, or achievements of WPG to be
materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, without limitation: changes in asset quality and credit risk;
ability to sustain revenue and earnings growth; changes in political,
economic or market conditions generally and the real estate and capital
markets specifically; the impact of increased competition; the
availability of capital and financing; tenant or joint venture
partner(s) bankruptcies; the failure to increase mall store occupancy
and same-mall operating income; risks associated with the acquisition,
development, expansion, leasing and management of properties; changes in
market rental rates; trends in the retail industry; relationships with
anchor tenants; risks relating to joint venture properties; costs of
common area maintenance; competitive market forces; the level and
volatility of interest rates; the rate of revenue increases as compared
to expense increases; the financial stability of tenants within the
retail industry; the restrictions in current financing arrangements or
the failure to comply with such arrangements; the liquidity of real
estate investments; the impact of changes to tax legislation and WPG’s
tax positions; failure to qualify as a real estate investment trust; the
failure to refinance debt at favorable terms and conditions; loss of key
personnel; material changes in the dividend rates on securities or the
ability to pay dividends on common shares or other securities; possible
restrictions on the ability to operate or dispose of any partially-owned
properties; the failure to achieve earnings/funds from operations
targets or estimates; the failure to achieve projected returns or yields
on development and investment properties (including joint ventures);
expected gains on debt extinguishment; changes in generally accepted
accounting principles or interpretations thereof; terrorist activities
and international hostilities; the unfavorable resolution of legal
proceedings; the impact of future acquisitions and divestitures; assets
that may be subject to impairment charges; significant costs related to
environmental issues; and other risks and uncertainties, including those
detailed from time to time in WPG’s statements and periodic reports
filed with the Securities and Exchange Commission, including those
described under “Risk Factors”. The forward-looking statements in this
communication are qualified by these risk factors. Each statement speaks
only as of the date of this press release and WPG undertakes no
obligation to update or revise any forward-looking statements to reflect
subsequent events or circumstances. Actual results may differ materially
from current projections, expectations, and plans, if any. Investors,
potential investors and others should give careful consideration to
these risks and uncertainties.

RECONCILIATION OF NET OPERATING INCOME GROWTH FOR COMPARABLE
PROPERTIES

Washington Prime Group Inc.

(INCLUDING PRO-RATA SHARE OF UNCONSOLIDATED PROPERTIES)

(Unaudited, dollars in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

Variance $

2017

2016

Variance $

Reconciliation of Comp NOI to Operating
Income:

Operating income

$

24,293

$

38,425

$

(14,132

)

$

123,693

$

119,638

$

4,055

Depreciation and amortization

65,383

71,287

(5,904

)

199,514

211,922

(12,408

)

General and administrative and merger, restructuring and transaction
costs

8,108

7,832

276

26,027

57,982

(31,955

)

Impairment loss

20,892

20,701

191

29,401

20,701

8,700

Fee income

(2,247

)

(1,696

)

(551

)

(5,770

)

(4,909

)

(861

)

Management fee allocation

54

417

(363

)

567

7,186

(6,619

)

Pro-rata share of unconsolidated joint ventures in comp NOI

16,056

7,659

8,397

49,065

27,524

21,541

Property allocated corporate expense

3,407

3,090

317

9,816

9,895

(79

)

Non-comparable properties and other (1)

(1,275

)

(2,579

)

1,304

(13,044

)

(6,896

)

(6,148

)

NOI from sold properties

(415

)

(5,709

)

5,294

(2,273

)

(21,208

)

18,935

Termination income and outparcel sales

(397

)

(243

)

(154

)

(3,450

)

(1,310

)

(2,140

)

Straight-line rents

(168

)

(818

)

650

(999

)

(717

)

(282

)

Ground lease adjustments for straight-line and fair market value

20

(2

)

22

50

(12

)

62

Fair market value and inducement adjustments to base rents

(1,273

)

(4,018

)

2,745

(6,319

)

(7,982

)

1,663

Comparable NOI

$

132,438

$

134,346

$

(1,908

)

$

406,278

$

411,814

$

(5,536

)

Comparable NOI percentage change

-1.4

%

-1.3

%

(1) Represents an adjustment to remove the NOI amounts from
properties not owned and operated in all periods presented, certain
non-recurring expenses (such as hurricane related expenses), as well
as material insurance proceeds received in the periods presented.
Furthermore, Southern Hills Mall is removed as the management and
leasing of the property was transferred to the receiver during the
fourth quarter of 2016, although title to the property is still held
by an affiliate of the Company.